By Professor Patrick Minford, CBE
Patrick is the Chairman, Economists for Free Trade. He is Professor of Economics at Cardiff Business School, part of the University of Wales. Patrick is the author of The Cost of Europe, and Should Britain Leave the EU?: An Economic Analysis of a Troubled Relationship. Professor Minford is also a member of the Bruges Group's Academic Advisory Council.
The Chancellor is making his Spring statement on Wednesday; it will be a mass of confusion. He proclaimed in his Budget that he would like to cut taxes, even while he was then busy raising them - a stance by all reports he still holds to. This stance was illogical and self-contradictory.
Tax rates should be stable over time as it is damaging to raise tax early for today's businesses, in order to lower them more for tomorrow's; it is best to keep the tax rates steady over time and that is the reason why a government should borrow. The only proviso is that the government will be able to afford to pay off the interest and principal later - be 'solvent' in other words.
There is no question over this country's government solvency. Markets are eager to lend to us at record low interest rates, lower in fact than the rate of inflation.
This means that allowing for inflation reducing what we will pay back, markets are actually paying the government to borrow - the government is in effect making a profit on its borrowing.
But you would never believe this from the lugubrious noises coming out of the Treasury and its ally, the Office of Budget Responsibility, who are imposing short term rules to restrain borrowing via renewed austerity and raising taxes, to pay off the Covid debt rapidly.
These rules make no sense; if you look over the long term the prospects for paying off our debt are extremely good.
As the economy recovers fully from Covid into 2022, tax revenues will rise and benefit payments will fall, both sharply; accordingly the Public Sector's Borrowing Requirement, the PSBR, will fall in spite of necessary spending and without the tax rises the Chancellor has planned.
Another factor boosting revenues is the big rise in inflation we are seeing with the spike in commodity prices now worsened by the Ukraine crisis.
The implications are that the PSBR will fall sharply in the coming financial year 2022/23 to around 2% of GDP, without any need for higher taxes.
Subsequently, it will go on falling to zero in a couple of years. This is after allowing for the likely rise in interest rates and in inflation (on index-linked bonds).
All this implies that the government's debt ratio to GDP will fall steadily. Longer term projections imply it will get to around 50% within a decade. So there is really no need for the Treasury-OBR panic on debt and borrowing.
Indeed, the real need today is not just to keep tax rates down which we can well afford to do, but to go further and cut them now or soon to stimulate growth. With Brexit done and the Covid crisis behind us, the big need is for government policy to support growth.
This means that the spending-tax mix must keep demand strong while tax cuts and a new pro-business regulative philosophy are rolled out to stimulate supply and entrepreneurship.
This agenda would be good not just for growth but also for levelling-up; my Cardiff research group's projections show that it will be an even bigger tonic to the North than to the South, so helping to close the gap and level up the UK.
They also show that it is completely affordable. This is because the higher growth raises tax revenues, offsetting the original tax cuts. The Chancellor endorses tax cuts by his own admission. But his Treasury has bullied him into submission, turning a deaf ear to these points and pressing instead for tax rises.
This Treasury strategy is not just missing an opportunity to strengthen the economy in this crucial time, post-Brexit and post-Covid, and in response to the stagflation threatened by the Ukraine crisis. It is actively dangerous. Raising taxes now- the reverse of what is needed- could easily backfire and create a recession.
That would wreck not just the economy but also the public finances the Treasury is so anxious to protect.
The Chancellor has the opportunity in his Spring statement to change course towards a strong and bold strategy of supporting the economy's growth prospects at a key moment in our history. He should grasp it firmly with both hands.
This article first appeared in The Daily Express